Personal debt dips for first time

The total amount of personal debt in the UK has fallen for the first time since records began in 1993, the Bank of England has said.

Personal borrowing fell by £600m in July, taking the total owed by individuals down to £1.457 trillion.

There was a drop in both mortgage debt and other forms of borrowing such as bank loans.

The number of mortgages approved in July rose again to 50,123, suggesting property sales will continue to rise.

"Total net lending to individuals fell by £0.6bn in July, showing a net repayment for the first time in the series," the Bank said.

The amount outstanding on mortgages fell by £400m as people repaid more than they borrowed during July.

ANALYSIS

Hugh Pym, BBC chief economics correspondent

According to the Bank of England, the number of monthly mortgage approvals has crept up slowly this year, suggesting the appetite for lending is picking up a bit.

But that seems to be outweighed by homeowners who want to reduce their mortgage borrowing. Anyone on a tracker or variable rate mortgage has seen a big reduction in monthly outgoings.

So the question arises, what to do with the extra cashflow? Investing in shares or property may seem unattractive, so too the return on some deposit accounts. For some, paying off debt then appears to be the best option.

In theory, paying off some of the £1.4 trillion mountain of consumer debt is desirable. But a tendency for people to reduce debts rather than spending may not be helpful to an economy still in recession.

The amount accumulated on what is called consumer credit, such as loans and hire purchase agreements, dropped by a net £200m, once a small rise in credit card borrowing of £92m was taken into account.

"Today's news will not make happy reading for policy makers who have taken significant steps over the last year to encourage greater volumes of lending throughout the economy," said Benjamin Williamson at the centre for Economics and Business Research (CEBR).

Homeowner Richard Otten told the BBC that the interest payments on his mortgage had fallen in the past 18 months from £1,800 a month to just £200, but instead of spending the saved cash he had been using it to pay off his home loan quicker than planned.

"I left my repayments as they were, so what's in practice happening is that I'm paying off capital much faster than I would otherwise have been doing, and therefore the length of my mortgage is reducing very significantly," Mr Otten said.

Still subdued?

The increasing number of mortgages approved, but not yet lent, is widely seen as a good indicator of future trends and indicates that the revival in sales seen this year will continue into the autumn.

The BSA expects the mortgage market to remain similarly subdued over the remainder of 2009

Adrian Coles, BSA

July's increase in mortgage approvals was the sixth monthly rise in a row and took the number of approvals to nearly twice the level recorded last November.

If sales continue to rise then prices may continue their recent pick-up as well.

"The mortgage market continues to show signs of some sort of recovery when compared to the first few months of this year," said Adrian Coles, director-general of the Building Societies Association (BSA).

However, he pointed out that activity was still much lower than in previous years.

"The BSA expects the mortgage market to remain similarly subdued over the remainder of 2009," said Mr Coles.

Dwindling savings

With the Bank of England's bank rate still at a historical low of 0.5%, the BSA warned that interest rates were so low that this year savers might take more money out of their savings accounts than they put in.

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Withdrawals from building society accounts have outstripped new deposits every month since March.

Even taking into account interest added to people's accounts, July was the third month in a row that savings balances held by building societies customers had fallen.

Adrian Coles warned that this process would hinder the ability of banks and building societies to lend money to potential home buyers.

"Total UK savings balances might struggle to increase by £11bn in 2009, much lower than the £60bn increase in balances in 2008," he said.

"These figures include interest added to accounts. If this amount of interest were not included, such a low forecast for 2009 suggests that savers will actually withdraw more money than they deposit this year across the entire savings market," Mr Coles added.

The Royal Institution of Chartered Surveyors (Rics) warned that the reduced number of lenders in the market would also put a cap on any increased mortgage borrowing.

"The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to potential homebuyers," said Rics chief economist Simon Rubinsohn.

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